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Expenditure on exploration and production, or E&P, in North America is expected to remain flat at $185 billion this year compared to $183 billion in the last year. However, international E&P spending is expected to reach $460 billion this year, growing by 9% annually. Growth in global spending is a result of high oil and gas prices, approval of major projects, and an increasing number of rigs. Hence, I believe that it will be worthwhile to look at drilling companies that are likely to gain from their international operations. I have picked up one such contract drilling company that will gain from its international operations in Middle East, Africa, Europe, and Asia. Let's see what investment opportunities are in store for this company's shareholders going forward.

International Operations on the Rise

Schlumberger's (NYSE:SLB) revenue grew 8% year over year to $11.18 billion in the second quarter of 2013, fueled by high growth in its international segment. The company reaped the benefit of growing drilling activities, and hence creating demand for its services. The international segment generates the highest revenue for Schlumberger, and further growth in this segment will lead to incremental revenue. Its revenue from the Middle East and Asia grew 11% to $2.7 billion as a result of increased drilling and exploration activities in this region.

To leverage more from this region, Schlumberger opened a new reservoir laboratory in Chengdu, China, recently. This 32,000 square-feet laboratory will help the company to cater its customers in geomechanical and petrophysical services, which will improve production. Schlumberger has contracts with oil and gas giants like Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and ConocoPhillips (NYSE:COP) and it charges around $15.4 million per rig in these areas for providing its services. Additionally, the per rig revenue of the company in the Middle East and Asia is expected to rise to $16.3 million as a result of increasing demand from oil producers. With this strong set of developments in the Middle East and Asia, its revenue in this segment is expected to grow further from $9.14 billion in the last fiscal year to $10.17 billion this fiscal year.

If we look at Europe, CIS (The Commonwealth of Independent States), and Africa, Schlumberger registered a revenue growth in these regions as well. Revenue grew 10% quarterly due to seasonal growth and better weather in these regions. In Norway, the company's 11 contracts extended and it bagged a five-year contract from Shell as well. Schlumberger charged around $8.12 million in the last fiscal year for providing its services for each rig in Europe, CIS, and Africa. It is expected that the company's rate per rig will further increase in the upcoming years due to increase in the number of rigs, extended technology, and services.

The company also expanded its product portfolio through acquisitions to cater to the need of its clients, and is seeking performance-based contracts rather than fixed contracts. Performance-based contracts will allow Schlumberger to generate more revenue due to its efficiency and products. With this I'd assume that the average revenue per rig for the company will increase to $8.7 million in the next fiscal year, which will result in further revenue growth for Schlumberger. Rig count is also expected to increase in these regions from 1,410 in the last year to 1,530 in the next fiscal year, as a result of substantial increase of investments in the Sahara desert, the North Sea, and other regions. These factors prompt me to forecast revenue growth of around $2 billion from Europe, CIS, and Africa in the next fiscal year.

Incompetence of Peers

Schlumberger's competitor Baker Hughes (NYSE:BHI) recently came up with a data showing a sharp decline of rigs count in the U.S., which is the lowest since March 2013. Oil rigs declined by 15 to 1,382 recently, while gas rigs declined by one to 387. I assume that the declining rig count is a result of increasing stockpiles, as 57 billion cubic feet of gas is pending -- higher than the five-year average of 56 billion cubic feet of gas. Recently, Energy Information Administration said that the supplies of natural gas decreased 7.2% year over year against inventories. This is a concern for Baker Hughes as it generated revenue of around $10.64 billion last year from North America onshore operations.

Due to decreasing oil and gas explorations, and increasing inventories, the U.S. oil output fell by 53,000 barrels a day. Further decline in the oil and gas output is expected as oil producers will focus on clearing inventories. These events prompt a pessimistic outlook on the North American revenue contribution, which will decline from 50.7% in the past year to 48.4% of the total revenue this year.

Click to enlarge image.

Source: YCharts.

Additionally, Schlumberger's quarterly revenue surged significantly from $7.36 billion in 2008 to $12.24 billion currently. This increase was much higher than its competitors Baker Hughes and Halliburton (NYSE:HAL) as revenue of both these companies increased from $3.01 billion and $4.85 billion in 2008 to $7.31 billion and $5.48 billion until now, respectively. Moreover, Schlumberger is not depending on the U.S. onshore drilling activities and has a diversified portfolio ranging from Latin America to Southeast Asia.

Valuations

Schlumberger's stock is around $81 with a price-to-earnings-growth, or PEG, ratio of 1, which is ideal for any stock to have. The company has had a negative annual EPS growth rate of 0.70% in the last five years. However, looking at the earning opportunities, the annual EPS growth rate for the next five months stands at 17.48%. Also, Schlumberger's PEG ratio of 1 is superior compared to Baker Hughes' 1.26 and Halliburton's 1.16. PEG ratio refers to price-to-earnings growth, which shows the capacity of the companies in earning. I believe that stock price of Schlumberger has further upside potential compared to its peers, and hence it will outperform.

Conclusion

Considering the attractive growth opportunities of Schlumberger, a diversified portfolio, and better market position compared to its peers, I recommend investors buy this stock at current levels to make long-term gains.

Source: Drill Profits From This Oil And Gas Contract Drilling Company